Ohio Offers $215M of Double-A Garvees, With Big Chunk of BABs

The bonds are divided into two tranches, including $98 million of taxable Build America Bonds and $117 million of tax-exempt fixed-rate bonds. The tax-exempt bonds mature from 2011 through 2015 and the BABs mature from 2016 through 2021. The state last sold federal grant anticipation revenue vehicle debt in 2008. Proceeds from the new issue will finance a series of highway and bridge projects.

Bank of America Merrill Lynch is senior book-running manager on the transaction. Keybank Capital Markets Inc. and Siebert Brandford Shank & Co. are co-senior managers, with another six firms rounding out the underwriting team.

The state structured the debt to mature in only 11 years to limit the risk that Congress might not reauthorize the grants. Congress reauthorizes the federal highway program every six years.

“As a state we felt it was prudent to stay within two federal reauthorization windows,” said Jake Wozniak, director of the office of debt management in the state treasurer’s office. “That’s part of our strategy and partly why we can obtain such high ratings on our bonds.”

The finance team expects the relatively short BAB maturity will benefit pricing. “Typically you see BAB issuance out to 30-plus years, but because our maturities are in the short end we expect there will be less supply, so we’re looking for a strong pricing execution,” Wozniak said.

Moody’s Investors Service rated the bonds Aa1. Standard & Poor’s rated them AA, and Fitch Ratings assigned a AA-minus. All three agencies maintain stable outlooks on the credit and all of Ohio’s outstanding parity debt.

As with all Garvee sales, the key risk for investors is the uncertainty of federal grant reauthorization. Congress has in the past delayed reauthorizations of transportation legislation, credit analysts noted.

Falling gasoline tax revenue or shifting national priorities further contribute to the risk. But the Federal Aid Highway Program remains a popular program with broad support.

The previous program, SAFETEA-LU — Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users — expired last September. It is currently extended through the end of 2010 through a series of short-term reauthorizations.

At the same time, the federal highway fund has suffered from shortfalls as reimbursements to states eclipsed revenue and $8.7 billion of spending ability was rescinded last year.

To ease investor concerns over reauthorization risk, Ohio’s Garvee program requires the Ohio Department of Transportation to set aside debt service payments a year in advance. The program also prohibits ODOT from using any federal highway aid until it has set aside payments for its Garvees.

“This feature establishes a powerful incentive to ensure that sufficient funds are set aside to make principal and interest payments,” Moody’s said in a report on the transaction.

The state taps into its motor fuel tax revenue to prefund its debt service payments.

In addition, ODOT’s excess appropriation and cash at the end of the year can be tapped to pay debt service if federal funding lapses, Fitch noted.

Bond documents stipulate that the state must have at least five times debt service coverage for its Garvees. As of fiscal 2009 debt service coverage totaled 7.2 times.

It will be Ohio’s seventh taxable BAB sale. But unlike other borrowings, the state this time will pledge the 35% federal interest rate subsidy to bondholders, in part to protect the flow of funds into the bond service fund, said David Tiggett, assistant director of the office of debt management.

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